Even if Aereo Wins Supreme Court Case, Can the Company Compete?

The Supreme Court recently decided to hear the Aereo case, which centers on whether Aereo is essentially another cable company that will be regulated as one (and pay retransmission fees) or whether it is an individualized service such as a home VCR that is exempt from transmission fees and cable regulation. 

Aereo took a risk with this all or nothing strategy. The company wanted to consolidate its court challenges to save on litigation cost and accelerate its expansion, but if Aero loses it will be quite calamitous for them. The outcome will likely hinge on whether the Court defines the services on a strict technological basis or more on a functional basis. 

Technologically, the company offers each subscriber an antenna, which is like having a virtual pair of rabbit ears for receiving over the air broadcasts.  Many lower courts have taken this view and have ruled in favor of Aereo. Most likely, the Supreme Court will look at the technology more broadly, and will consider the role of shared equipment: transcoders, servers, software, storage, routing and switching, network access.  Since not all of these can be neatly or efficiently cordoned off and dedicated to each customer, does that make Aereo a type of common carrier? What happens if the location of the antenna is positioned so that the stations available to the customers are different from what they can receive in their home, even if slightly? Does this change the classification of the service as an over the air antenna rental? What about renting an antenna in a different metro area, does that change the nature of the service? Does it change the regulations that are applied?

If the Court takes a more functional view, will it consider Aereo’s service functionally equivalent to cable service and, therefore, subject to the same regulations? While there are differences, it seems to me that Aereo’s service is indistinguishable from basic cable service. It is interesting to note that cable originated as community antenna TV, which is functionally quite similar to Aereo. 

Given these issues, the outcome of the court case is far from certain for Aereo, and even if the company wins, can it scale the technology? I suspect that adding a new antenna (actually two according to the web site) for each new customer eliminates the possibility of economies of scale and the costs for space, power and storage could become burdensome as subscriber numbers get into the millions. 

Regardless of how the Supreme Court rules, the decision will be momentous in how it shapes the industry. If Aereo prevails, consumer choice will increase, and the industry economics will be changed dramatically. Content owners will lose substantial leverage and probably significant revenue from retransmission fees. MSOs will face new, stiff competition that when combined with OTT streaming will be a formidable low-cost alternative to cable. On the plus side for MSOs, they might gain additional leverage in negotiating retransmission fees. If Aereo loses, expect to see further consolidation as incumbents seek to strengthen and protect their positions.

For more information about ACG Research's services, contact sales@acgresearch.net.

David Dines

ddines@acgresearch.net

www.acgresearch.net

The Weather outside is Frightful, Time for ACG’s Annual Predictions for Video

It has been a tough year for many sectors of the video business. The STB business took a big hit and is now generally recognized that it is a commodity business. Home gateways grew significantly. The transition to CCAP is leaving many QAM vendors out in the cold and fights over retrans fees are not helping.

Pay TV is no longer a must have service, (about one-quarter of Charter’s customers do not want TV service) and cord cutting/shaving is becoming more common. Competition from outside the traditional competitor circle is getting stronger. Netflix continues its robust growth and now has 40 million subscribers. Google is continuing its fiber rollout. In an apparent response to Google, AT&T recently announced GigaPower, a fiber-based service with 300 Mbps and a free upgrade to gigabit service available next year.

The industry structure is shifting and talks about consolidation are rampant. Time Warner and Comcast both hired M&A staff. On the equipment side, Arris is still assimilating Motorola. Cisco is working on shifting its business away from commodity hardware to software with its NDS assets. With technology, viewing habits and competition rapidly changing, ACG sees consolidation as necessary and inevitable.

Tablets continue to grow and video viewing on tablets/mobile devices are the fastest growing segment. Forty-eight million tablets were shipped in Q3 13, 37% Y-Y growth rate. Video is about 44% of all mobile data usage and is expected to account for over 60% by 2018. 

MSOs are recognizing the need to change viewing experience with better user interfaces and more OTT like viewing options. Charter and Liberty both tested cloud-based UI/guides that are more competitive with the OTT players. They are also getting serious about business services and other services such as home monitoring. 

Trends:

• 2014 will be the year of 
• CCAP 
• Home gateways 
• Online video advertising systems 
• Cloud-based UI deployments 

• STB prices will continue to fall; there will be increasing competition from no-frills vendors.
• Traditional pay TV subscribers will continue to fall in developed countries; OTT services will grow.
• More MSOs will launch multiscreen and OTT like services, though if history is a guide, few will take much share from Netflix and other OTT services.
• Current home monitoring/security offerings from the MSOs will be modestly successful. Offerings must overcome negative brand perception that MSOs created over with high prices and poor service.
• Pay TV subscribers in developing nations will continue to grow, though long term we see that penetration rates will disappoint as customers just get data service and watch via streaming.
• Google will continue to deploy fiber in existing markets and may announce one more market in 2014, but no massive nationwide effort. 
• Google’s Loon project with weather balloons in the stratosphere is fraught with technical and business problems; there is a slight chance of it being deployed commercially. 

 For more information about ACG's video services, contact sales@acgresearch.net.

David Dines
ddines@acgresearch.net
www.acgresearch.net

Q3 2013 Mobile Market Update

The mobile infrastructure market continues to be a bright spot for the telecom industry. According to the industry statistics (GSA), 109 LTE networks have launched commercially in the past 12 months for a total of 222 commercial networks in 83 countries. The GSA expects 260 commercial networks by the end of 2013. Additionally, 474 operators in 138 countries are investing in LTE, of which 421 have made commitments to deploy.

Additionally, mobile broadband is living up to growth expectations: subscriptions are now over two billion, and the number is expected to grow to 9.3 billion by 2019. Of these, there are currently 100M LTE subscribers, and this expected to grow to two billion in five years. This approximate 4X growth in subscribers will drive a 10X growth in network traffic.

Mobile infrastructure spending remained strong in Q3 2013, up 3% annually to $1.2B. This growth is because of the continued strength in LTE globally, although North America is starting to peak, but other geographies are starting their ramp. The Chinese wireless carriers are just beginning their deployments, and we should see extensive growth in the coming quarters. EMEA is awakening from its slumber is starting to show signs of life.

Mobile IP Backbone grew 4.3% Y-Y. Mobile IP Backhaul continued its robust growth at 21.7% Y-Y as additional backhaul capacity is needed to deal with the increase in data handled at existing base stations as well as for new small cell sites. The Mobile Packet Core segment was down double digits Y-Y, primarily because of delays in North America.

Small cells have been one of the major hubs of innovation in the past few years and did not disappoint this quarter: it grew 42% Y-Y, with growth across all segments. Femtocells increased 57% Y-Y; picocells increase 34% Y-Y; and micro/metrocells increased 31% Y-Y. SP WiFi remained strong at 40% Y-Y increase and IP backhaul grew 22% Y-Y.

Small cell adoption has not been a smooth curve as some carriers misjudged consumers’ price sensitivity early in the adoption cycle and the demand did not meet initial expectations for femtocells. ACG sees the most interest in unlicensed spectrum/WiFi offload because of the lower costs and increased flexibility. Other issues that will impact adoption rate are LTE transitions/hetnet operations, hotpsot 2.0, new backhaul technologies such as millimeter wave and free space optics (FSO), and power.

The capacity enabled by LTE is rapidly changing the face of information technology and enabling the always-on/connected society. The next wave will enable high-quality video entertainment, video communications, gaming, location services and commerce, not just voice calls and texting. The race to  provide these services and be more than dumb pipes is paramount to MNOs. This pressure is propelling technology vendors to develop the solutions to enable and control this complex environment.

For more information about ACG's mobility services, contact sales@acgresearch.net.

David Dines
ddines@acgresearch.net
www.acgresearch.net

Arris: First Earnings Post Positive since Motorola Home Division Acquisition

In the interest of full disclosure here are my biases: When Google first announced its acquisition of Motorola Mobility, from a strategic standpoint I was mostly negative. Other than the patents, I did not see much value or a fit with culture, expertise or products. I also assume that Home Division customers were probably uncomfortable making long-term architectural commitments to Google. If the acquisition was just about patents, then Google paid a premium. During the short tenure, there was little hard information, but anecdotally, it seemed that my assessment was correct and that Motorola Home was losing momentum. When Google announced that it was selling the Moto Home division to Arris, I was mostly bullish. There was a much better fit with Arris’ culture, management expertise, and products. This purchase gave Arris a more diverse customer base.  

As with any large acquisition, assessing the long-term success is tricky especially with a dearth of information. Now, with Arris’ first earnings post acquisition, we have some more insights. Revenues grew a huge (and expected) 186 percent, roundly beating earnings expectations. Arris is moving quickly to integrate Moto, and the company is already starting to see cost savings with supply chain efficiencies. On the product side Arris is seeing significant shipments of the E6000 (mostly to Comcast), with deployments and trials in multiple geographies. The company can boast wins in infrastructure and CPE, for example, Comcast XG1 hybrid QAM IP gateway.

The negative news came primarily from Moto, which lost momentum because of Google ownership[1]. Gross margins were down to 23 percent from nearly 34 percent last year, and the traditional STB business is down 8 to 10 percent from last year. I am most concerned about the gross margin. A back of the envelope calculation reveals that Moto’s gross margins[2] are 17 percent (see the delta column in Table 1).  

The challenges of integrating the two companies, rationalizing products, processes and organizations are more straightforward because the levers of change are mostly under the company’s control, which allows it to find the duplication/inefficiencies, make tough choices and address damage control. Boosting gross margin is a greater challenge, because it takes longer and is more nuanced. External factors, such as technological change, competitive pressures, customers’ needs, and internal factors, such as product design/life cycles, and manufacturing processes, limit degrees of freedom in moving the needle.

While I am still mostly bullish on the Arris/Moto combination, there are significant challenges ahead for its management team. Increasing Moto’s gross margins is one I would put at the top of the list. 

---

[1] From Robert J. Stanzione in the earnings call on August 7, 2013: “As I mentioned during our call, after the close of the Motorola Home transaction, there was a loss of momentum caused by disruptions and distractions within Motorola, as well as a parent customer reluctance to fully engage our new product initiatives, given some of the uncertainties surrounding the business.

[2] This is not the exact number as it includes some organic growth and excludes the $66M revenue/$6M margins, pre-acquisition results but is a good approximation for analysis purposes.

For more information about ACG Research's Video Infrastructure service, contact sales@acgresearch.net.

David Dines
ddines@acgresearch.net
www.acgresearch.net

Takeaways from the Cable Show 2013

It was apropos that the 2013 Cable Show was held in Washington D.C. considering the big role that regulators play in the industry. Not only did attendance seem lighter than last year, but opening sessions on Day 1 also were disjointed with speeches that were self-congratulatory, lacked substance, and made claims that were hard to believe, such as “the industry is an innovator; the US is really a leader in average Internet speeds.” And “all content will be available on all screens regardless of what MSOs and programmers think, and today’s disruption is really about business models.”

In Day 2 Michael Powell’s (president and CEO of NCTA) interview with Mignon Clyburn (current acting chair of the FCC) was interesting from a human perspective but lacked any real content. Brian Roberts demonstrated the Xi3 box and the new X2 user interface for Xfinity, which include voice commands and seem to be as good if not better than Siri. It appears to be powered by Veveo. I was impressed because it seems that Comcast finally got religion about user experience; it will be interesting to see how fast they can roll it out and how well it will actually works in the home.  

Other themes

M2M/IoT: CPE vendors and service providers were demonstrating home security, monitoring and control capabilities—a huge growth opportunity and a natural extension of their existing markets.  

Cloud: Cisco demonstrated cloud DVR (http://www.acgresearch.net/knowledge-insights/videos/cloud-dvr-perspective.aspx). ActiveVideo demonstrated cloud-powered guides. ActiveVideo showed that mission-critical functions can be moved to the cloud. The company also announced wins with Charter and Cablevision.

CCAP: Cisco, Arris/Moto and Casa demonstrated their capabilities, and we are starting to see commercial shipments, which should continue throughout the year. 

Gateways are starting to gain traction as well. Cisco was giving a sneak peak at its G8 hybrid IP gateway. Arris and Technicolor also were showcasing their products.

Azuki Systems, an innovator in delivering multiscreen over legacy networks, unveiled an approach for using its technology to reduce the bandwidth requirements for first screen viewing to enable QAM reclamation.

For more information about ACG Research's VideoInfrastructure service, contact sales@acgresearch.net.

David Dines

ddines@acgresearch.net
www.acgresearch.net

2013: The Year of Over the Top

Video continues to be the major driver of bandwidth demand on fixed and mobile networks. According to a report by Sandvine, it consumed 62% of peak time fixed Internet bandwidth and 43.5% of mobile bandwidth in North America. In other regions, viewership is lower but is still significant and growing.

H.265/high-efficiency video coding (HEVC) capabilities are just starting to enter the market. We anticipate that adoption will be faster in mobile because of the rapid turnover of devices and the capacity limits of the RAN. In wireline, it will take longer to see mass adoption, as operators balance the efficiency and service gains against the costs of replacing significant amounts of CPE as well as the encoding infrastructure. The other argument for HEVC is the ability to offer new, ultra-high definition (UHD or 4K) service. We believe the jury is still out regarding consumer interest in UHD because of the extra cost of the sets, lack of available programming and perceived improvement in viewing experience.

TV everywhere or multiscreen viewing is now accepted by the SPs as table stakes in providing video. The issue that SPs are starting to address is not so much supporting tablets and connected TVs but identifying what content is available and improving the users’ experiences in search and discovery. 

Competition from over-the-top (OTT) players Netflix, Hulu and YouTube continue to post impressive traffic gains. Netflix continues its quest to acquire original and premium content. It is adding premium children’s programming, acquired rights to “Arrested Development” and just inked a deal with DreamWorks Animation for approximately 300 hours of new television episodes. This deal will be closely watched by both OTT incumbent pay TV operators and other OTT providers such as Amazon, Hulu and YouTube. Although the incumbents have not yet felt a significant impact of OTT in cord cutting or cord shaving, this new deal will likely turn up the heat. 

ACG has been consistently saying that OTT is a disruptive technology/business model and that it would eventually resolve the issues that slowed adoption early in the life cycle (low quality of experience and lack of compelling content). It appears that 2013 is going to be the year that OTT comes into its own. 

For more information about ACG Research's Video Infrastructure service, contact sales@acgresearch.net.

David Dines
ddines@acgresearch.net
www.acgresearch.net

Declines in Most Segments of Video Infrastructure Market

The Worldwide Service Provider Video Infrastructure total market was down 7.2% Q-Q and 10.3% Y-Y. The declines were in nearly all segments with only core routing and CMTS with sequential increases this quarter.

Cable and IPTV STBs declined because of slowing subscriber growth and ASP declines. CMTS gained 6.4% quarter-Q but declined 26.2% Y-Y. The decline was caused by volume shipments of higher density line cards and software upgrades to existing line cards, which dramatically lowered average selling prices. Packet infrastructure posted an annual decline in core routing and was nearly flat in edge routing.

Not surprisingly, Cisco is the dominant player in the space because of its broad-based coverage of the market and is the only vendor with strength in routing, switching and CMTS. Cisco has also been leading the IPTV STB market for several years and took the lead in cable STBs from Motorola.

1Q/13 Worldwide Service Provider Video Infrastructure
Company	Rank	Market Share
Cisco	1	48.7%
Motorola	2	13.7%
Alcatel-Lucent	3	7.7%
Pace	4	6.8%
Juniper	5	4.7%

1Q/13 Worldwide IPTV STBs
Company	Rank	Market Share
Cisco	1	42.0%
Motorola	2	14.6%
Skyworth	3	7.2%
ADB	4	6.7%
Pace	5	6.6%

1Q/13 Worldwide Cable STBs
Company	Rank	Market Share
Cisco	1	31.3%
Motorola	2	31.2%
Pace	3	12.1%
Humax	4	6.0%
Skyworth	5	4.7%

For more information about ACG Research's VideoInfrastructure service, contact sales@acgresearch.net.

David Dines
ddines@acgresearch.net
www.acgresearch.net

Business Case for ActiveVideo's CloudTV

ActiveVideo has introduced CloudTV, a cloud-based approach to delivery of modern user interfaces and other applications. This cloud-based approach supports immediate delivery to all consumer devices and at much lower cost than set-top box-based (STB) solutions. The cloud-based approach eliminates the need to develop device-dependent software and application program interfaces (API) for devices, including several generations of STBs, media hubs, Blue-ray players, connected televisions, game consoles and personal media players. It also eliminates the need to undertake an expensive and time consuming program of replacing first-generation STBs.

ACG Research compared the total cost of ownership (TCO) of the immediate deployment of CloudTV to all consumer devices to a program of upgrading STBs to support a modern user interface. It found an 83 percent TCO savings over five years for CloudTV as compared to the STB replacement program. The analysis also tested the robustness of the TCO findings by performing a number of sensitivity studies. These studies found that the TCO savings of CloudTV are significant and extend well beyond probable operating conditions. 

Click here to download the TCO.

Click here for more information about ACG's business case analysis consulting research service.

Michael Kennedy

mkennedy@acgresearch.net
www.acgresearch

Seven Myths of Machine to Machine

Interest in machine to machine has been gaining considerable momentum in both the press and industry and is expected to boost new productivity in many industries and require a new IT ecosystem. 

The interest in machine to machine (M2M), sometimes called the Internet of Things or IoT, is prompting a degree of hyperbole in the industry—as often happens with new technology. In addition to inflating expectations, too much hoopla can confuse the market and detrimentally overshadow some of the realities of drivers, adoption rates and addressable market size. In spite of the hype (which is typical in the early adoption cycle), M2M is a substantive technology transition that will create a new market and ecosystem. However, the industry needs a reality check related to the myths associated with M2M.

Click here to download the Market Impact.

David Dines
ddines@acgresearch.net
www.acgresearch.net

Cisco Leads in SP Video Infrastructure Hardware and Software Markets

Cisco continues to hold its commanding leadership position in the SPVI market (ACG Research’s Service Provider Video Infrastructure 4Q 2102 Worldwide Market report). Not surprisingly, Cisco has held a leadership position for many quarters based on it strengths in CMTS and packet infrastructure. It is notable that Cisco has been solidifying its position in STBs by taking share from Motorola in IPTV STBs and developing cable STBs (second place in market share).

In aggregate, the SP Video infrastructure market shrunk 2 percent to $13B in 2012. CMTS revenues dropped in the high single digits in 2012 though it remains a $1+ billion industry. CMTS build out is starting to level off as MSOs are completing their DOCSIS 3.0 build out and as port densities are doubling and reducing ASP. Cable STBs have been essentially flat, based on declining video subscribers; however, a mix of HD and DTAs has helped buoy the market. IPTV STBs were also down, driven by price pressures and demand for low-end devices in emerging markets.  Packet Core and BRAS saw double-digit declines in annual revenues; Carrier Ethernet gained modestly.

ACG also published its Video Infrastructure Software and Services Market 4Q 2102 report, which tracks conditional access systems (CAS), digital rights management (DRM), middleware, subscriber software and infrastructure software (head end, workflow, advertising). In the aggregate, Cisco leads this market, based on its strength in CAS. 

When combined, the hardware and software markets are approximately $16 billion in annual revenue. While we have seen a flattening of growth, this sector remains very strategic to SPs. The market is undergoing a transition as SPs deal with 1) competition from over-the-top video competition, 2) how to deliver video to multiple smart devices within the home, and 3) upgrading infrastructure to handle increasing bandwidth demand of consumers.

For more information about ACG Research's video infrastructure services, contact sales@acgresearch.net

David Dines
ddines@acgresearch.net
www.acgresearch.net

How Apple Turned a Loyalist into a Critic in One Transaction

Apple’s current disinterest in customer service, once a hallmark of differentiation, has propelled the company from being outstanding to just ordinary.

I did not realize that I would have a personal experience with how far and quickly Apple has fallen. I am on my second battery with my four-year old MacBook Pro; the new battery is a little under two-years old. Two months ago, it started saying “service battery.” The message said it was not urgent but should be looked into soon. I checked it today and it was under 70% percent of design capacity after 282 cycles. Online, Apple issues guidelines that its batteries should have 80 percent life after 300 cycles (http://www.buzzle.com/articles/macbook-pro-battery.html). Several people had written that they got some help from the Genius Bar. Silly me, I figured customer service was important to the company, and it would give me the benefit of the doubt and replace it or at least give me some break. After all, I was quite pleased with my other Genius Bar appointments.

At the store, the tech told me my battery was “consumed” and that it was not covered by warranty because it was over a year old. I mentioned the standard was 80 percent after 300 cycles. The tech searched their support site and found nothing so I asked for the manager. Instead of the legendary service I was expecting, he lectured me in a condescending and combative tone. I was miffed and disappointed and left with a bad taste in my mouth (it was worse than dealing with the cable company).

The point: Apple has changed fundamentally. The old culture of obsessing about innovative products and customer service seem to be a distant memory. Instead, customers are now a transaction, and the profit on each transaction is more important than long-term loyalty.

I wonder how much it would have cost Apple to replace my battery or give me something toward the unused portion (like tire companies do), maybe $20? Now, I am no longer a loyalist. I will need to replace two MacBook Pros in the near future, and if you had told me two days ago I would be considering something other than another Mac I would have looked at you as if you were crazy. I like the iPad, but I will definitely look at other devices when I need to upgrade; I’ll do the same with my iPhone. As for the AppleTV I had my eye on, forget about it. I will probably buy a Roku or Boxee. I calculate the failure to give me that $20 has put thousands of dollars of sure business in jeopardy.

I have been reticent to criticize Tim Cook just because he is not Steve Jobs. Now, I feel he deserves a big dollop of criticism. Although I do not expect him to be Steve Jobs, I do expect him to be great in some other way. Besides the major missteps on his watch, he has allowed the company to delegate delighting customers to secondary priority. This was a key area that always differentiated Apple from everyone else. Now it is just an ordinary company. It has good products and O.K. service, but it does not stand out from the crowd anymore. 

For more about Apple, click Peaking Companies: Apple Has Ripened.

David Dines
ddines@acgresearch.net
www.acgresearch.net

Peaking Companies: Apple Has Ripened

Disclosure: I am an Apple user; I have a MacBook Pro, iPad2 and iPhone 4S.  I am quite happy with these products, but I am not a raving fan. Why? There are lots of little disappointments and annoying features that seem easy to fix. Now my attitude is positive/neutral, but I would consider other brands when I purchase my next new device.  

Disclaimer: This should not be considered advice for buying or selling any equities. Personally, my stock picking record is not good, so I have given it up and do not hold any individual equities in any companies about which I write. 

We have seen it before: big corporations get so big and consequently, they have difficulty with technology inflections, the need to increase their addressable markets, and adding more markets to continue their glory and meet the expectations of Wall Street.

Historically, I have observed that companies are slow to admit there is a problem and turnaround/comeback plans are audacious and high risk and usually unsuccessful. IBM peaked back in the 1970s before minicomputers ate their lunch. DEC rode the minicomputer wave, peaked in 1987 and was a shell of its former self in just five years. Dell and HP have similar stories. We have too many examples of companies soaring and becoming high fliers and then dropping and in some cases crashing rapidly. History is repeating itself; Apple is now in this category.

Apple has had an amazing run of growth, great products and huge profits. It seemed it could do no wrong, but that was then.  Now, it seems the company can do little right. iPad mini was not very impressive; AppleMaps was a disaster; the iPhone 5 was somewhat disappointing. Not only did the iPhone 5 force everyone to a different charger, but it also broke Bluetooth connections with many devices. The result is that are doing major damage to the brand, resulting in a reduction in demand for iOS devices.

Many Apple fans are abandoning their apple product and are considering other brands — unconceivable just a few years ago. This is natural as the essence of brand is human reaction/feelings, and our emotions are influenced by little things. If enough little things accumulate it triggers a cognitive switch, and we generalize those little negative feelings toward everything about that brand. (Banks, cable and telephone companies have this problem.)

Apple has reached its long-term peak (two to five-year frame), and it will not regain its glory. Since the company no longer has a one-of-a-kind product visionary, Apple needs to either replace the visionary or transition to a different business model. Because it was able to produce great new products or create all new categories every four to eight years, it could beat competitors to market, command higher prices and higher margins. In an incremental product enhancement model, profits are challenged with lower margins, and competitors Samsung and Google are formidable if you do not keep changing the rules of the game or the categories.

IMO, Apple’s major problem is that it lacks a product visionary. Steve Jobs was a genius, and it is hard to replace that. There are other models to foster insanely great innovations absent a superstar, but I do not see this yet in Apple. Tim Cook appears to be a reasonably good manager, and Jonathan Ives is a great designer, but neither are product visionaries. It is not easy, and maybe they need to change the culture, policies and attitudes towards innovation. They have already started to follow Google’s lead with the Blue Sky initiative (employees are allowed time to pursue projects); however, it won’t work without real buy-in and respect from top management. Until we see that, do not expect Apple to return to its former self any time soon. 

For more information about ACG's video services, contact sales@acgresearch.net.

David Dines
ddines@acgresearch.net
www.acgresearch.net

Arris' Aqcuisition of Motorola Home Division: Verdict, Please

Arris recently purchased Motorola Home Division. The jury is still out as to whether or not it is a wise purchase.

It was not surprising to see that Google sold the Motorola Home Division. It was clear from the outset that it was a bad fit for Google. As you may recall in previous blogs, I had suggested that Google had no expertise in running a hardware business (http://acgresearch.blogspot.com/2012/10/google-motorola-can-this-marriage-be.html), and it probably had little interest in legacy-type technology.  Although official statements to the contrary, the latest announcement and reports in the press essentially confirm my initial assessment.

On balance, I am positive about this deal. The pros: 

• Strategically, this acquisition makes sense for Arris because it greatly diversifies its product portfolio and solidifies its presence in Tier 1 MSOs in the Americas.
• There is some product overlap, (for example, CMTS and QAMs), but it is not that significant, especially given that the majority of Motorola’s revenues are derived from STBs.
• Arris has technical expertise and credibility within the industry and has experience with the design, manufacturing and selling of cable hardware.
• Arris diversifies its customer base substantially and reduces its reliance on Comcast and TWC, which are about 50 percent of total revenues.
• Arris’ management has a good track record and has delivered consistent growth over the last few years.
• The combined company is sufficiently large to compete effectively with Cisco

The concerns to watch are: 

• Execution risk: Can Arris effectively swallow a company twice its size? Will it be able to integrate the two companies fast enough to minimize loss of momentum? Will the cultures assimilate?
• Market risk: Will the combine product strategy/portfolio/roadmap meet the market transitions? Will the economic uncertainty continue to put downward pressure on SPs’ CapEx? 
• Financial Risk: Will Arris be able to increase Motorola’s historically low margins? Was the price too high?

Personally, I was glad to see Motorola end up in competent hands (the other bidder, Pace, is also a competent player in the space and would have been a good match as well). It was hard to watch the division suffer under the lack of attention, strategic vision and direction provided by Google. While we see this as a positive development, we will not know how it turns out for several years.

For more information about ACG Research's Video Services, contact sales@acgresearch.net.

David Dines
ddines@acgresearch.net
www.acgresearch.net